Update on Brown-Forman; Avoid investment-grade corporate bonds; My experience running for mayor of NYC
1) This Wall Street Journal article from Monday, Kentucky Bourbon Bust Derails Spirit Maker's Plan to Pay Bank With Barrels, prompted me to check in on spirits maker Brown-Forman (BF-B).
While the article doesn't mention Brown-Forman, the "bourbon bust" it references is clearly weighing on the company's beaten-down shares...
Since its peak in 2020, the stock has lost two-thirds of its value and is near a 13-year low:
On December 17, I did a deep dive on the company. My analysis showed the company had attractive financial characteristics, with high margins and robust free cash flow.
However, trends were negative, and its valuation was too rich to interest me.
But I concluded that it was worth keeping on my radar:
My instinct and experience tell me that fair value for a stock like this might be 18 to 20 times current-year earnings, meaning I would only be interested in buying it at, say, 13 to 15 times earnings. (Normally I look for 50-cent dollars, but I would pay closer to intrinsic value for a high-quality business and low-risk stock.)
So I'll keep an eye on Brown-Forman and hope the stock gets whacked by a bad quarter or two... At that point, the valuation might get low enough where it looks like a good buy.
Sure enough, the stock did get "whacked by a bad quarter or two" and tumbled 35%. That led me to take another look at the company on June 10.
The stock has been flat since then. But I still haven't pulled the trigger for two reasons...
First, its valuation isn't quite cheap enough for me – at 16.9 times this year's earnings estimates and 16.1 times next year's.
As I wrote in December, I'd only be interested in buying at 13 to 15 times.
Secondly, I'm concerned about the significant headwinds the business faces, which could cause further earnings misses.
As reader George R. wrote in response to my June 10 e-mail, the changes Brown-Forman is making to its distribution system may be impacting sales.
On June 16, I shared insights from another reader, industry veteran Tom V., who echoed George's concerns about distributors.
He added that the "spirits industry as a whole continues to trend down as younger drinking age consumers (who influence brand growth) seem to be trending away from spirits and into other stimulants for many different reasons."
And the WSJ article indicates that the bourbon bust could last quite a while:
Kentucky's bourbon market is oversaturated with inventory at a time when some consumers are moving away from spirits...
A so-called "bourbon bust" finally hit Kentucky, as the sale of American whiskey, which had kept rising since 2009, peaked in 2022 and started to decline, according to trade association Distilled Spirits Council of the United States.
Tensions with U.S. trade partners also put pressure on U.S. distilled spirits. Canada, one of the top markets for Kentucky bourbon, recently removed its retaliatory tariffs on U.S. spirits, but the ban on U.S. spirits sales remains in place in most provinces.
My Stansberry's Investment Advisory team and I will continue to keep a close eye on Brown-Forman. If we decide it's compelling enough to recommend, as always, our subscribers will be the first to know.
(If you aren't an Investment Advisory subscriber already, you can find out how to become one right here.)
2) I don't follow the bond market very closely – I'm a stock guy...
But after reading two recent WSJ articles on the subject, it's obvious that investors should avoid investment-grade corporate bonds.
That's not because they're going to blow up, but because investors aren't getting paid enough for the incremental risk and lower liquidity they're getting relative to Treasurys.
The first article highlights an extreme example: Microsoft's (MSFT) bonds yield less than Treasurys.
Microsoft is a great company and deserves its AAA rating. But these bond yields are absurd, given that, among other reasons, the U.S. government has an unlimited ability to tax the company. Excerpt:
Among U.S. corporate bonds rated AAA, two [Microsoft bonds] in the main index currently trade a little below the equivalent yield on Treasurys, known as a negative spread. This is extremely unusual, both because companies are in principle much more likely to default than the government that can tax them, and because the corporate bonds are harder to trade, so should yield a little more to compensate buyers for the difficulty in selling them quickly.
Yet, demand for high-quality corporate bonds has been so great that it's driven the ICE BofA AAA U.S. Corporate index to a spread of only 0.3 percentage point over Treasurys, a tiny reward for the additional risks of holding company debt and far below the 2-plus points reached in the past two recessions. It's small enough that some of the best bonds get pushed to yield less than the government. It makes no sense.
"You're getting a lower yield for something that's less liquid too," says Mike Riddell, a bond fund manager at Fidelity International. He thinks Microsoft and other top-rated bonds should offer a yield 0.15 to 0.2 points above Treasurys purely for being harder to trade, without even considering the tiny risk of default...
The second WSJ article has a chart showing that the "yield premium" of investment-grade corporate bonds over Treasurys hit a 27-year low last month:
The article explores the possible reasons for this: attractive yields, memories of zero interest rates, strong corporate fundamentals, and lack of bond and loan supply (scarcity).
I don't need to understand why investors are behaving in a certain way about a particular stock or sector to know it's foolish... and to stay away.
3) Many readers have asked about my experience running for mayor of New York City, so I wanted to share a few thoughts...
I got into the race just after Thanksgiving. December, January, and February were exciting –with lots of packed events, favorable press coverage, and strong initial fundraising.
But my polling never went above 2%. New York is enormous, larger in population and budget than the state of Washington. And I was an unknown outsider with no organization, endorsements, or the ability to self-fund.
I also never articulated a clear, compelling message – nor did anyone else in the field other than Zohran Mamdani, who correctly identified affordability as the No. 1 issue and developed a set of policies to address it, however unrealistic or misguided.
(In politics, the likely winning strategy is to promise the maximum amount of free stuff to the maximum number of votes – and tell them they won't have to pay for it!)
Then, when former governor Andrew Cuomo entered the race on March 1, it became clear that I had no path to victory.
Making matters worse, I'd built a large team of two dozen people in anticipation of receiving millions of dollars in matching funding from the city. If I had raised $250,000 from NYC residents by the mid-March filing period, my campaign would have received $2 million based on the 8-to-1 match.
But I came up just short, and the next filing period wasn't until May, so I had to lay off half my team and borrow $250,000 just to keep the lights on.
I wasn't getting invited to mayoral forums or other events, the press moved on, and nobody wanted to meet with me. So my days were empty – other than hours of dreaded "call time," phoning everyone I'd ever met to beg for money.
Those two months were the lowest of my life – sheer misery.
But in mid-May, six weeks before primary day, everything turned around when we qualified for matching funds, received $2 million, and made the stage for the two televised debates.
The delay turned out to be a blessing in disguise because, had I received the funds in March, I would have spent them trying to buy myself name recognition.
But by mid-May, I knew I couldn't win, so I decided that the best thing to do for my city was warn my fellow New Yorkers about Mamdani. It was too little, too late, but I'm proud of the last six weeks of my campaign.
In summary, I'm glad I ran. Even though I finished seventh out of 11 candidates, it was an incredible experience. I met so many interesting people and gained a much deeper understanding of important issues like crime, housing, infrastructure, mental health, homelessness, etc.
And I was able to elevate issues I care about, like fighting antisemitism, supporting charter schools, and reforming our mediocre, wildly expensive public school system.
I now have an even greater appreciation for this great city.
I got into the race because I thought NYC was rapidly going to hell in a bucket. But having spent seven months visiting every corner of the city, I'm now much more bullish on its future.
New York is so vibrant and entrepreneurial, with such incredible culture and diversity! And it has become much safer this year: Subway crime and shooting incidents hit all-time lows in the third quarter, and murders are down 17.4% year to date.
Lastly, the "City of Yes" zoning-reform legislation has unleashed a lot of new development and affordable housing incentives.
So I'm never leaving – no matter who the mayor is!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.